How Do Business Cash Advances Work?

Let's talk business cash advances

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Every business faces the need for capital sooner or later.

Whether you’re just getting started or need a quick influx of cash on hand, you may be wondering: “What is a merchant cash advance?” A merchant cash advance is a more flexible and faster funding alternative to a business loan.

What makes a merchant cash advance the right choice for your business? Let’s find out!

We’ll explain all you need to know about business cash advances, the benefits of this funding option, and how you can apply for your own cash advance online.

What is a Merchant Cash Advance?

A merchant cash advance (MCA) provides you with an upfront sum of money. In exchange, you give back a percentage of your future sales.

Two of the most popular methods of business funding are a merchant cash advance or a business loan.. Here’s how they differ:

Merchant Cash Advance: A MCA provider gives a business upfront cash. The repayment terms are based on a portion of future sales.
Business Loan: A loan is also upfront cash, but the repayment is made in set monthly installments with a fixed or compounding interest rate.

Benefits of a Merchant Cash Advance

Need cash fast? A merchant cash advance can provide you with it. But, that’s not the only benefit of choosing this funding option.

Here are a few more benefits that a MCA brings to the table:

Forget Credit: When you apply for bank loans, the bank will assess your credit rating and could deny your loan based on a poor rating. If you have less than optimal credit, you shouldn’t lose the opportunity to build your business. A cash advance provider cares more about your monthly sales over (than ) your past credit history. That’s why you don’t need a high credit score to be approved for a cash advance.

Payback Varies: When you take out a loan, you have to pay it back according to a set repayment term. With a cash advance, you are promising a portion of future sales. This means that if you have a bad month of sales, you pay back a smaller amount than you do during a month of high sales.

No Personal Guarantee: Unlike standard business loans, MCAs do not require a personal guarantee. This means that in the unfortunate case that your business cannot repay its cash advance, the business owner is not individually liable for the business debt.

Your Money, Your Way: When you get a lump sum of money from a merchant cash provider, the money is yours to do what you want with it. Unlike loans, you don’t have specific restrictions on how you use it. For example, you can allocate 50% to purchasing inventory, 25% to payroll and the remaining 25% to marketing efforts. On the other hand, many loans come with strings attached. For example, a SBA 504 loan cannot be used to buy inventory. In this way, a merchant cash advance offers a more flexible option for business capital.

Lowered Risk: Forget about putting your assets on the line. With a cash advance, your business’ health is not used as collateral for the money you borrow. You give back a portion of what you’re making, so you don’t have to worry about your credit score or legal repercussions of defaulting payments.

Fast Cash: The ability to get capital quickly could make or break your business. On average, a loan could take 10 to 15 days to process. Instead, you could apply for a cash advance online and receive funding within as little as 24hrs.

No Collateral Required: Many traditional business loans require the business to use its assets as collateral. These include the business premises, inventory and even vital equipment. This is not the case with merchant cash advances.
New & Non-Traditional Businesses: MCAs are perfect for new and non-traditional business. Unlike banks that require a business to have been in operation for more than 2 years, MCAs are available for businesses that have just 6 months of revenue. They are also a great resource for online businesses, ecommerce, drop ship businesses, social media influencers that may not have physical premises.

Drawbacks of a Merchant Cash Advance

For all their advantages, merchant cash advances have a number of drawbacks. As a responsible and informed business owner, it is important to be aware of these when applying for an MCA.

Here are a some of the drawbacks of this form of business financing:

Cost of Capital: MCAs can be expensive. The cost of capital is calculated as a factor rate rather than an interest rate. For example a factor rate of 1.28 indicates that the borrower will pay 28 cents for every dollar they borrow.

Daily or Weekly Payments: Most MCAs have daily or weekly payment terms. These work well for businesses with consistent daily revenue such as restaurants but may not suitable for businesses with less consistent cash flow such as consultants, construction companies and lawyers.

How Do I Repay a Cash Advance?

A fast cash advance feels like a gift, but it’s important to remember that it’s not free money!

You will have to pay back the lump sum over time. However, the repayment term is set up to correlate with your monthly sales.

There are generally two ways to pay back your cash advance. These include:

Percentage of Credit Card Sales: Your cash advance provider will deduct a percentage of your credit or debit sales until the lump sum amount has been paid back in full. This means that the more sales you have, the less time you’ll need to repay the total amount borrowed.

Fixed Withdrawals: There’s a daily or weekly payment that will be deducted automatically. This amount is determined based on an estimate of your monthly revenue. The withdrawal amount is set in advance. Therefore, this option does not depend on how your sales are doing.

Is a MCA Right for My Business?

While a merchant cash advance may not be the solution for all businesses, it is the best option for many. These are some of the most common reasons and types of businesses that seek a merchant cash advance:

Your business is new and doesn’t qualify for alternatives
You have a poor credit rating
You lack assets to be used as collateral
You want capital for a short-term need
You have a preference for flexible repayment terms

The Bottom Line

It’s inevitable to have to fund your business. Yet, the way you choose to do so is up to your preferences and potential constraints. A merchant cash advance offers you with a flexible, fast, and easy way to get business capital whenever you need it!

Want to find out more about Uplyft Capital’s programs? Or, do you want to be matched with the best loan provider through our marketplace? No matter your preference, our team is here to help you get the funding you require as fast as possible.